Compliance Digest - 7th May 2024

Welcome to this week’s Compliance Digest.  This week I focus on two particular issues.

• The Regulatory Perimeter

• A UK Finance publication: Building a Better Society – a financial services manifesto for the UK

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The Regulatory Perimeter

The regulatory perimeter is a topic that is raised periodically by the FCA as new products as services enter the market.  Cryptoassets are currently outside the regulatory perimeter apart from registration as an ‘Annex 1 firm’ under the Money Laundering Regulations.  The regulatory perimeter is set by the Government and Parliament, it determines what the FCA does and does not regulate.

The Perimeter Guidance Manual (PERG) is in the Regulatory/Registry Guides Block of the FCA Handbook and is split into 17 sections covering the breadth of FCA regulation.  For example, chapter 2 covers authorisation and regulated activities, chapter 8 covers financial promotions and related activities.

Alongside PERG the FCA periodically publishes a Perimeter Report focusing on issues that are on its radar.  The last such report was published in April 2024.  The report describes specific issues that FCA sees around the perimeter and the action it is taking in response.  The Financial Services & Markets Act 2023 (FSMA 2023) has changed the perimeter, which the FCA notes in the report.

FSMA 2023 provides for the repeal of financial services related provisions in retained EU law, enabling the FCA, through new rule-making powers, to make rules to replace those provisions.  This means the FCA is responsible for maintaining those rules in the future, adapting them as appropriate to the needs of UK markets and consumers.

As part of this, FSMA 2023 creates the Designated Activities Regime (DAR), which sits alongside the Regulated Activities Order (RAO).  Some activities currently regulated under retained EU law are not ‘regulated activities’ under the RAO and may be carried out by non-financial services entities or persons not authorised by the FCA (for example, listing a company’s shares on an exchange).  The FCA currently supervises and enforces these activities under retained EU law, but they are not regulated activities and it lacks rule-making powers for them in relation to unauthorised persons.

The DAR framework will enable the Treasury to ‘designate’ activities, and to confer rulemaking, supervisory and enforcement powers to us over them.  The FCA’s rulemaking under the DAR will apply in relation to the designated activity, but not the other unrelated activities of the person carrying on the designated activity. 

Initially, the Treasury will designate activities to enable the FCA to make rules to replace relevant provisions in retained EU law that are being repealed under FSMA 2023.  But use of the DAR is not restricted to these activities, and the Treasury will be able to designate further activities in future.  This will ensure that the regulatory framework and perimeter can adapt, for example, for new types of activity where the risks associated with a particular activity change in a way that merits bringing it within scope of regulation, but where authorisation would be disproportionate. 

Designating activities beyond the current scope of retained EU law would expand the FCA’s remit and regulatory perimeter.

The FCA will review the regulatory perimeter to determine if there is harm caused by the development of new products, activities, and services that sit outside the perimeter.

At Compliance Matters UK Limited we review the regulatory perimeter periodically and will advise when changes affect the products and services offered by our clients.

UK Finance: Building A Better Society – a financial services manifesto for the UK.

UK Finance: is the collective voice for the banking and finance industry.  It represents 300 firms and is a centre of trust, expertise, and collaboration at the heart of financial services.

With General Election on the horizon, UK Finance has published a manifesto for financial services in the UK under three headings.

1. Supporting people and businesses

2. Supporting communities and society

3. Supporting growth

Supporting people and businesses

The financial services industry helps millions of customers make the most of their money, supports those in financial difficulty and plays an essential role in enabling people to realise their dream of owning a home.  The manifesto makes six key recommendations:

a) improving the environment for savers by reviewing personal savings allowances;

b) deliver financial education through the school curriculum, including across all devolved nations;

c) establishing a new cross government taskforce to help tackle financial abuse;

d) maintaining the currently increased thresholds at which movers and first-time buyers pay Stamp Duty on a home purchase and increase Stamp Duty bands annually in line with the UK House Price Index;

e) creating an independent Retrofit Advisory Service - a ‘one stop shop’ for free retrofitting advice, modelled on similar services in Scotland and Ireland;

f) extending the new Growth Guarantee Scheme for the full term of the next parliament.

Supporting communities and society

Criminals steal over a billion pounds a year through payment fraud.  This has a huge psychological impact on individuals, damages our economy and threatens our national security.

In all its forms, fraud accounts for more than 40% of all crime but receives less than 1% of police resource.  The manifesto makes five key recommendations:

a) introducing a new Fraud and Scams Bill which draws on the Online Fraud Charter;

b) making technology, social media and telecoms companies contribute to the cost of tackling economic crime and fraud reimbursement;

c) legislating to ensure information held on Companies House can be properly verified and relied upon;

d) publishing detailed Net Zero investment roadmaps for key sectors of the economy;

e) giving the UK Infrastructure Bank a greater mandate to invest in Net Zero projects to unlock private investment.

Supporting Growth

Economic growth is key to the UK’s future success.  The financial services sector is both an enabler of growth and a key economic sector in its own right.  The manifesto has five key recommendations.

a) championing the National Payments Vision and Strategy to ensure a world-leading payments ecosystem;

b) issuing a digital gilt backed by HM Treasury to encourage the development of securities tokenisation;

c) creating a government champion for competitiveness with a remit to produce an annual report to parliament on the burden of regulation for financial services, including the impacts on different types of financial services firms;

d) publishing a tax roadmap for financial services;

e) Using the Berne Financial Services Agreement as a blueprint for agreements with other overseas financial centres.

The report highlights that UK financial services employs nearly 1 million people, with two-thirds of them working outside London.  The banking sector contributes 4.6% of the Government's tax receipts, totalling £41 billion.

That puts into perspective the importance of financial services in the UK and the importance of protecting our clients by having robust policies and procedures supported by robust systems and controls.

If you would like Compliance Matters UK Limited to review your compliance systems and controls schedule a free, no-obligation consultancy call with us today. 

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